Did The Financial Reforms Of The Early 1990s Fail? A Comparison Of Bank Failures And FDIC Losses In The 1986-92 And 2007-13 Periods
May 17th, 2015
from the Richmond Fed
From the mid-1980s to the early 1990s, the United States experienced a severe commercial banking crisis. There were 998 bank failures between 1986 and 1992. Of non-de novo banks in existence at the end of 1985, those holding 5.4% of bank assets and 6.0% of bank deposits failed and went through Federal Deposit Insurance Corporation (FDIC) receivership over this same period.
Two of the more significant banking reforms that came out of this period were the increased regulatory capital requirements of Basel 1 and the prompt corrective action (PCA) provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The latter provisions built on the increased capital requirements of Basel 1 by requiring bank supervisors to take certain actions against a bank if its regulatory capital drops below certain thresholds. The purpose of PCA was to force supervisors to intervene in the operations of a bank and even shut it down, if necessary, before a bank becomes too severely distressed. These provisions were motivated by the heavy use of forbearance by thrift and bank supervisors in the 1980s and the belief that this forbearance increased the losses to the FDIC, and ultimately taxpayers, from failed banks and thrifts.
Despite these reforms, the recent financial crisis severely impacted commercial banks. There were 403 failures over 2007 to 2013. Of non-de novo banks in existence as of the end of 2006, those holding 2.2% of bank assets and 3.1% of deposits went through FDIC receivership between 2007 and 2013.